The Rotten Core : Why Europe’s Giants Are Crumbling

Europe’s Economic Decline is Real. What it Actually looks like is However not what You’ve Been Told it does

Leo and Kaiser Bauch 

 

“You’re losing.”

That was the stark judgment of Jamie Dimon, CEO of JP Morgan, the largest bank in the world by market capitalisation, speaking at an event in Dublin about a year ago. “Europe has gone from 90% of U.S. GDP to 65% over 10 or 15 years. That’s not good. The EU has a huge problem at the moment when it comes to the competitiveness of its economy.”

This echoed the warning by Mario Draghi, one of the most respected members of the technocratic EU establishment, made a year earlier in his report on the competitiveness of the continent. Ringing the alarm bells about Europe’s pervasive falling behind has become something of an evergreen over the past decade or so. Complaining about the lack of impactful European tech companies especially has gotten as old as cheese way past its due date. Even though one might be slightly annoyed by all the kvetching, this assessment of Europe being uncompetitive is still largely correct.

Yet one must always look past the aggregate numbers talking about the European economy as a whole, since the reality is that while the European Union represents a powerful homogenising force in many respects, Europe is still a continent of many different regions and countries with very different levels of economic development and culture.

Beyond the narrative of the ‘European’ economy and its competitiveness, a multitude of simultaneous stories unfolds, which often move in contradicting directions. A most interesting pattern emerges, but is not often mentioned: the European countries affected most by various forms of economic, social and political decline tend to be the largest, most important and most populous ones. They also often happen to be former imperial powers.

The Sick Men of Europe

The United Kingdom and France, historically great rivals, the second and third most populous countries of Western Europe and once its mightiest colonial powers, seem to somewhat mirror each other in their chaotic socio-political development.

The political centre, represented by Labour Prime Minister Starmer and President Macron, seems to be singing its swan song, while populist challengers from both left and right sharpen their knives, confident that their time is coming. Yet few truly believe that this change will bring a return to stability in societies convulsed by lack of economic growth and ethnocultural divisions caused in large part by mass immigration from former colonial territories. Some even speak of the real possibility of more widespread political violence.

If we look at labour productivity — or simply how much value a worker creates per hour of work — which is perhaps the ‘cleanest’ measure of economic sophistication, since it removes both the impact of population and employment growth that often distorts GDP figures and the differences in working hours that can distort GDP per capita, we can see that both countries are facing long-term stagnation.

Using the 2010 level as a baseline of 100%, productivity in France and the UK in 2025 would stand at 106% and 107% respectively. For frame of reference, labour productivity in the US economy grew by 25% over the same period, and in Poland by 50%. Yet before one concludes that Poland is simply undergoing catch-up growth and the US is an exception, it is worth noting that even countries like Denmark or Switzerland have grown their productivity by nearly 20%. The annual labour productivity growth in France between 1999 and 2025 was 0.3%, showing that its stagnation started even before the 2008 crises.

Italy, a nation of almost 60 million people and thus the third most populous country in the EU, has become the epitome of economic stagnation. It is in fact one of the few European countries — along with Greece and Luxembourg — whose labour productivity has not grown at all since 2010, currently sitting slightly below that level. Facing strong demographic headwinds with persistently low fertility and the second oldest population on earth after Japan, spending 16.1% of GDP on pensions — the highest figure in the world — and burdened by decades of very high debt that severely limits the government’s fiscal options, it is very hard to imagine significant growth for Italy anytime soon. Stagnation, at this point, seems like the optimistic scenario.

And of course, there is the industrial heart of the old continent: Germany. In the aftermath of the 2008 crisis, Germany was seen as the uncontested hegemon of Europe — it weathered the crisis better than its peers, returned to growth, recorded massive trade surpluses and even reduced its already considerable public debt through budget surpluses.

Yet when problems came, they formed a perfect storm, with enough power to sink a Bismarck-class battleship. The reality is that Germany’s successful 2010s were the product of a confluence of factors that were never going to remain in place. The Chinese economic boom was fueling enormous demand for German industrial products such as cars, but especially the machinery used to equip Chinese factories.

Cheap gas from Russia guaranteed competitive energy prices, keeping industry viable. The massive baby boom cohorts were in their peak productive years, still working but edging towards retirement, which suppressed wages as workers preferred pre-retirement stability over pay rises. Meanwhile, the euro was undervalued relative to the needs of the German economy, further supporting exports.

Yet a good thing rarely lasts forever. Reliance on cheap Russian gas turned from a blessing into a curse as soon as bombs began to fall on Ukrainian cities. And as if that were not enough, Germany proceeded with its plan to shut down its nuclear power plants — which produce no CO2 — in order to reduce the amount of CO2 it produces. If you needed to read that sentence again because you thought you had missed the logic, do not worry. There simply isn’t any. China, meanwhile, transformed from an export market into a ruthless competitor, slowly but surely squeezing the German industrial sector, which is a whopping 15% below its peak production levels from around 2017. The baby boomers began to retire, and the plan to replace them with Syrian refugees backfired as spectacularly as, say, the famous 1,300-tonne Gustav artillery gun would.

In terms of labour productivity growth since 2010, Germany fared somewhat better than the aforementioned countries, reaching close to 112% of its 2010 level. Yet that growth occurred almost entirely during the 2010s. Since 2020, German productivity has barely moved. The countries mentioned comprise half the population of, for lack of a better term, ‘political Europe’ — meaning the EU and non-member states such as the UK, Switzerland, Norway and so on. If they are in trouble, the continent as a whole will inevitably be.

Moreover, it is instructive to look at the 10 OECD countries with the lowest labour productivity growth since 2000. Five of the six founding members of the European Coal and Steel Community in the 1950s — the foundation of what would later become the EU — appear on that list. Luxembourg, Italy, France, the Netherlands, and Belgium all feature, with only Germany missing.

The View From the Periphery

Yet it is also true that Europe offers many examples of countries that remain dynamic, though these lie mainly in the continent’s periphery and are often among the smaller states. There is the post-communist East, which continues its catch-up growth and is drawing closer to Western European living standards, albeit with still a long way to go.

In the five years since 2020 alone, Poland and Croatia have recorded higher productivity increases than Italy or France have managed since the year 2000. GDP per capita in purchasing power parity in Czechia, Lithuania, Slovenia or Poland is now above that of Japan, Israel, or New Zealand — a testament to the staggering success of post-communist European economies’ efforts to bridge the gap with the West.

That Eastern Europe is growing faster than the European average is well known, yet another interesting story is unfolding in Southern Europe. Every year, The Economist puts together a ranking of the best performing advanced economies on the planet based on inflation, GDP growth, employment, and stock market performance. In 2022 and 2023, Greece took first place; in 2024 it was Spain, and in 2025, Portugal. How many people would have believed that ten years ago?

Moreover, Southern European countries were previously seen as a byword for chaotic public finances and an inability to rein in sovereign debt. Cyprus and Greece have recorded some of the highest public debt reductions in recent history, their debt-to-GDP ratios having fallen by a remarkable 60% since 2020. Portugal is not far behind, with a reduction of almost 40% over the same period. Greece and Cyprus recorded primary budget surpluses of almost 5% of GDP in 2025, with Portugal once again being close behind. It is of course true that these countries, and especially Greece, were very heavily indebted to begin with, and are therefore reducing their debt from an elevated baseline. Much of their economic growth — and thus their ability to generate budget surpluses — stems from the post-COVID tourism boom, a sector that does not meaningfully increase productivity, since it is difficult to implement new technologies when serving tourists their sangrias and tzatziki. Yet it illustrates something important: there are European countries that are capable of confronting their systemic problems, even when doing so requires making painful political decisions. Needless to say, this reality goes against the narrative of a continent which is unable to make tough choices.

 

 

 Spain deserves closer attention. Not only is it one of the largest countries in Europe, but also the fastest growing eurozone economy in recent years by far and, by some metrics, the best performing advanced economy on the planet, outpacing even the United States in both GDP growth and job creation in 2024.

Yet Spain’s vaunted unmitigated success story requires qualification. The perhaps uncomfortable truth is that the Spanish boom has been powered by the aforementioned massive tourism boom, a large increase in public spending, and consistently large immigration figures year after year, which I wrote about in a previous piece for LEO.

Spain has also not managed to reduce its public debt to the same degree as Greece or Portugal. These drivers of growth have one thing in common: they are not based on rising productivity or individual citizens getting wealthier. Yet growth still matters, especially for countries grappling with persistent government debt. There are however examples of countries that managed to combine similar mixes of increased spending and large immigration waves without achieving anything close to the nominal GDP growth seen in Spain, most notably the UK.

The Spanish economy has seen growth not only in tourism, but also in business services, consulting, and insurance. This is partly a consequence of increasing wages in Eastern Europe, which means that to many multinational corporations, Spain has once again become an attractive location for their administrative and back-office centers. While the Spanish case may not be nearly as glamorous as the headlines of The Economist suggest, it is still better to grow quickly with caveats than not to grow at all.

 

 

 So far we have only been talking about countries that are outside of the wealthiest part of Europe. Yet even in the latter we can find cases of countries that, while already among the world’s wealthiest, continue to grow and remain competitive. Switzerland, Sweden, and Denmark have managed to grow their labour productivity by 25-30% between 2000 and today, which is not quite at the American level, but much closer to it than Italy, France, the UK, or the Netherlands.

It is perhaps no coincidence that among all European states spending at least 3% of GDP on research and development — the threshold broadly associated with the most sophisticated and innovative economies — the only large country that qualifies is Germany, while the list is otherwise dominated by smaller states: Sweden, Denmark, Switzerland, Austria, Belgium, and Finland.

Sweden is a country of just over 10 million people, yet it is home to 48 unicorns ( tech companies valued at over one billion dollars),almost the same number as France, which has nearly seven times the population. This makes it the country with the fourth most unicorns per capita in the world, and Stockholm itself produces more unicorns per capita than New York or London. The Nordic countries, with the exception of Finland, along with Switzerland and The Netherlands, carry very low levels of public debt and operate some of the most sustainable and well-functioning public pension systems in the world. These are far better equipped to handle their ageing populations than even the United States, where Social Security runs a growing deficit every year that needs to be covered by federal government borrowing, which in turn contributes to the already large and dangerously growing government debt.

The Rotten Core

The economic malaise of Europe is, in reality, mostly the economic malaise of its largest and most important states: the UK, France, Italy, and, in the past couple of years, Germany.

Europe is being dragged down by its hegemons; it is they who tend to underperform relative to their economic weight. Had the UK, France, or Germany been able to produce as many unicorns per capita as Sweden, there would be far less talk of European tech’s impotence.

Had France or Italy been capable of the kind of debt reduction seen in Greece or Portugal, both countries would find themselves in a considerably more comfortable fiscal — and thus political — position. The same applies to the construction of more efficient pension systems, which is most glaring in France, which spends the second highest share of GDP on pensions in the world despite having relatively healthy demographics compared to Italy, Germany, or Japan. Had the UK been able to transform its post-COVID “Boriswave” of over 2.5 million migrants into the kind of growth Spain has delivered over the same period, the political atmosphere in the country would be at least somewhat less charged. Had the German industrial sector performed as Poland’s or Lithuania’s has over the past decade, there would be no talk of a sick man of Europe.

To examine the reasons for this state of affairs is a task for another time. Perhaps the EU’s fixation on making the continent increasingly centralised, no doubt inspired by the examples of China and the United States, is misplaced.

Europe is a continent that has always been defined by its great internal diversity, which encouraged fruitful competition within a shared civilisational framework.

The lesson is clear: no matter what the naysayers claim, Europe is not an open-air museum only. Currently, it is a continent where dynamic development and stagnation exist side by side. It simply needs its giants to turn the tide.